Good morning, everyone. Thank you for joining us here today to kick off the fourth day of the Morgan Stanley TMT Conference. Very pleased to have Pagaya. Evangelos Perros, the CFO, is here. He'll be speaking to us about Pagaya. Before we get started, quick introduction of myself. I'm James Faucette, a senior fintech analyst at Morgan Stanley. Before we start our conversation, I do have an important disclosure to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Great to have Pagaya at the TMT conference. For those who don't know Pagaya, I think it would be great if you gave a brief introduction about the company and where you sit in the broader financial ecosystem.
Yeah, happy to. Thanks for having me. Think of Pagaya as a tech-enabled network that connects lending partners on one side and investors on the other side of that network. We integrate our technology into the lending originating systems of those lending partners like SoFi, Ally, Klarna, U.S. Bank, other Fintechs. Working today on three asset classes, personal loans, auto, and POS. Our underwriting technology underwrites these loans on behalf of our partners and then places them in the pockets of institutional investors on the other side. It's a B2B B2C business model. We don't have a direct exposure to the consumer or interface with the consumer. Along those lines, we basically earn fees for the use of our technology in the network.
Most of that, almost 80% of those fees come actually for the use of our technology from the lending partner side. That's how interesting about Pagaya. We work now with almost 30-plus partners across the universe with a very good mix of banks and non-banks and Fintechs across the three asset classes. We have probably one of the largest independent sort of funding networks on the other side, one of the largest ABS issuers on personal loan, 155-plus unique investors that we work with, and that's how the network comes together.
Got it. Let's talk about some of the hurdles that we're seeing across all of Fintech, at least from an investor perspective. Especially there are a lot of fears right now, I would say, in the market around agentic AI. I think it's worthwhile to spend maybe a minute talking about whether you see that as a risk, an opportunity, something in between. Just love to get your thoughts on that.
As you think about Pagaya and what we do, we have like an end-to-end solution that we offer to our lending partners, going from the integration and underwriting all the way to their funding. It's an already AI-enabled platform on the front end, which primarily relies on our own production data, which is unique. We look at $1 trillion of application a year across all these multiple partners, across multiple channels, asset classes, and that's the production data that's quite unique, which is very difficult for a generic otherwise AI model to really replicate those capabilities, and find this data. We're not relying so much on our AI model, it's actually the production data that fits into that model. As I said on the front end, we're fully automated. I think, what I would say is...
I mean, there's a lot more things that come in our end-to-end solution from a compliance perspective, regulatory, legal, capital markets, analytics. In this structure that I laid out, Pagaya is not the originator on record. We still underwrite on behalf of our partners. When the regulatory, call it as an example, authorities come and ask questions to the originators, we need to be able to answer those questions, so we have to meet the same requirements on their behalf. It's a little bit different and insulated from this type of sort of, risk on the front end. On the back end, there is obviously significant opportunity. We pride ourselves that we have a very unique operating leverage in the business. The infrastructure is built out.
There is no real, incremental cost to run the business or marketing cost or other customer acquisition cost, but we can see a lot of opportunity of using some of those technologies and solutions to further decrease that type of operating expense, and therefore further fuel profitability for the business.
Got it. Got it. Let's expand a little bit and talk about the broader competitive landscape. Who do you think about as your competitors? I know some of the partners you talked about even have their own underwriting technologies, etc. Talk a little bit about how you fit within that and then the broader competitive landscape. I guess maybe the big question is what builds or constructs the moat competitively? Is it AI, data, something else?
To answer that second part of the question, it's the data. If you think about, what we do, we integrate with our partners into their loan originating system. All our production data, the $1 trillion application that we see across multiple partners, is quite unique to Pagaya because every partner will obviously see their own data. We are able to see across multiple partners and obviously for a more well-defined type of consumer profile. We don't go, deep sort of on the subprime. We obviously will not underwrite necessarily the 850.
It's actually a well-defined, broad, but well-defined consumer profile where we can come in and enable more conversion, more activation rate on behalf of our partners, and all of that with all the benefits that they get, the fifth generation, no use of capital, servicing fees along the line. It's a little bit of a unique business proposition, value proposition for them. When you look at the competitive landscape, there is no other entity like or company that does what we do, being a pure B2B on the consumer lending space.
In fact, I would say, you know, it took a lot of pain and effort and infrastructure investment to get to this point, to get the company to be cash flow positive and GAAP net income positive because of all the investment that you have to do. We feel good about calling the barriers to entry for somebody else to come in and replicate it. What really sort of protects that sort of competitive mode is actually the data. For somebody to come in and get integrated again to the same partners, they will have to have the data to do better underwriting than us.
Even in that case, the acceleration that we see, exponential acceleration that we see from more data that we get both with new partners, it's something that, again, you can never say never, but it will be very difficult for somebody to replicate that. The first mover advantage is actually quite important here.
Got it. Got it. Let's talk about kind of current environment for a few minutes. During our earnings call earlier this month, you communicated to investors that you had pulled back a little bit on how aggressive or, you know, tighten the box a little bit, if you will, during the December quarter. Help us understand exactly what you were reacting to. I mean, was it your capital partners, loan origination partners, some combination of both, or is it something completely exogenous to those?
Sure. Sure. I think that created some confusion in the marketplace. What I would say is there is effectively, call it two sources of signal that we relied on, but I think what's more important is our ability to actually react to things like that as a result of the unique business model that we have. Let me explain that. The signals were on one side, obviously a little bit more macro uncertainty. It was not necessarily seeing something on the consumer. The consumer is still healthy and resilient. Performance, current performance, everything is in line with expectations. On the funding side, continued deployment of capital.
We were sitting in December, if you go back, on an environment that had a few months of sort of uncertainty, whether it's the path of interest rates after the last cut, whether it's unemployment, whether it's the K-shaped economy, the upper end of the K, the bottom part of the K. Back then, geopolitical sort of uncertainty at that point in Latin America. Policy things around credit cards and the couple credit cards, and is that gonna be instituted, and is that gonna apply for personal loans? There was a little bit of uncertainty, but more importantly, it was somewhat protracted. It wasn't just a single moment of dislocation, let's say, similar to Liberation Day, where there was, you know, a week of dislocation, and it went off. That was point number 1.
The other one is we have the benefit of access to multiple different lending partners. What we saw is a little bit of a step back or more sort of balanced view on their plans to grow in 2024 relative to what we were all deriving in 2025. It was not them tightening the credit box. It was not something necessarily that they saw that was a real risk. When you're sitting in 2020, you know, we're looking at the 2024 plan on the back of call it 40%, 50% growth year-over-year in 2023, and now that growth coming down to 30% or so across multiple partners, that's for us a signal that it's not to be disregarded.
These are a little of the sources, but I think what people are probably missed is, where we sit to your point in the ecosystem and our ability to react. What do I mean by that? When I'm sitting in December, the CFO and looking at the plan for 2024 and debating about the decision to cut, call it riskier part of the production, which is purely a risk management decision, I see a plan that I can still deliver $100 million-$150 million of GAAP net income profitability in 2024 after that cut, that's a 50% growth in bottom line profitability. I feel pretty good about that decision, and I think it's very few sort of companies, if any, that can actually do that because of the operating leverage.
On top of that, the very strong visibility that we had from new flow that we expected to come from new partners and new products, and actually allow us to replace this sort of higher risk production with much more balanced risk, product-led and partner-led growth. I think those are the pieces that allows us to actually go to that decision with a very strong, you know, sense of confidence. I think that was probably a little bit that was, but the marketing didn't focus as much.
Let me ask a couple of things there. I mean, I think particularly when it makes sense incorporating the signal that you're getting from some of your lending partners and kind of their targeted growth rates. From their perspective, were they seeing the same things and also taking a little bit more conservative view, or was there really more just, hey, as we get bigger, growth rates come down? I just love to kinda get a sense from you how you are interpreting your partner signals beyond the other things.
It's a good question. The answer is, we don't really need to know at that point.
Okay.
It could be a consumer sort of view. It could be on their funding side. It could be on the competition side that they have with other, like, originating platforms that we may not be integrated with. We don't really have to have a full understanding at that point. Our ability to react almost, you know, instantaneously on that, and take a risk decision while still delivering the profitable growth. It's something that we'll generally obviously do. I think obviously the magnitude at which we did it was that exactly shows that it was a risk management decision, but it's something you should expect us to do over time as we continue to grow and deliver product-led growth, new partners coming in. Over time, you should see us cut more of that riskier production.
By riskier production, I just want to be clear, it's a profitable production for us.
Right.
It's priced for that risk, but it's more, let's say, prone to adversarial credit outcomes in the future if some of that uncertainty starts impacting the consumer, and therefore leading to. Why take that risk?
Right. just with your lending partners, how much forward visibility on their intentionality do they give you, and how is that communicated? Just trying to once again get a bit of assessment of how you may incorporate their commentary into your own forecast.
I think it's a very sort of, you know, we're talking about sort of deep relationships that we have delivered.
Yeah, I imagine.
It's not just the technology and sort of, the flow that we simply get, which obviously we have a very good understanding, but it's more so an ongoing relationship, regular business review that we have with them, sharing of the plans. Remember from their end, they're still sitting at that point in time and seeing us still delivering growth on their volume, all else being equal, because of the new products and everything that we're doing.
Right. Right. Right.
But it's a, it's a relationship that we have, like, from regular discussions, so we have pretty good understanding of how they're planning and what they're seeing and how we see it. Obviously, and as a sort of second in the sequence, right? They have a direct access to the consumer. They have a direct access to their consumer profile, and every partner has a unique sort of niche that they're looking at. Then we can all that put that together, and that's how we get to that decision.
Got it. Let's stay there with a little bit with current environment. This week, and I'm sure in your conversations, my conversations, the topic of credit performance right now is certainly top of mind, and seems to be maybe even more important than AI, which could be viewed down the road, but worried about the near term. What are you seeing right now, especially in the last few weeks? Anything of note in your asset classes, whether it be personal loans, auto or point-of-sale?
Yeah. The short answer is we don't see anything like materializing, any real cracks. You look at the consumer, as I said before, healthy and resilient. You look at the credit performance, you look at actual realized losses, they're pretty all in line with expectations. We do highlight, I think you've seen that to some extent, like some of the delinquencies coming up, which obviously, you know, something that we're monitoring all the time, and everybody does and should.
Yeah. Yeah.
Again, you need to put it in perspective and say you're looking at the delinquencies relative to, call it, a year ago. In 2025, let's say, obviously everybody's in a much more normalized production environment.
Right.
cost of capital has come down by, call it, 150-200 basis across interest rates cuts as well as spreads.
Right.
Specifically in auto, you have other components like very favorable rollover rates and actually much higher recovery rates that when you put it all together, it's actually pointing to, you know, very like well within expectation type of cumulative net losses. Again, if things continue to become worse or something, we'll be obviously, we will react. Like right now, when you look at the consumer, you look at the deployment of capital and the demand for this type of assets, and you look at the actual credit performance, nothing really pointing to something deteriorating.
That change in DQs, is that across all of the borrower spectrum, or are you seeing it concentrated in a particular area or another?
Yeah. Obviously for us, it's as I was saying before in the first question, it's somewhat well-defined sort of consumer profile. I think, you know, if you think about the average consumer that we're underwriting, let's say on the personal, it's a 680 type of FICO score, $150,000. If you think about where that consumer sits, it's not in the bottom part of the K, and it's obviously-
Right. Right. Right.
You know, it's sort of the top quartile or top 30% of the consumer. You see that a little bit across, I think you see much more pressure on the bottom part, like people that are potentially still struggling, not struggling, but having a little more challenge meeting some of their needs, like $60,000, $50,000, $60,000 of income. We see it in our parts, again, it's like you need to keep in mind that we're solving for a certain return.
Mm-hmm.
The cost of capital is lower. You would expect a little bit of a different data performance to capture that, but not something that gives us sort of, pause, in our current underwriting.
Got it. The other question is, you know, there's headlines this week on newspaper around private credit funds. I think there's been a couple of issues even outside of the U.S. with some other credit funds that makes everybody nervous. What are you seeing in the private credit space? Are you seeing slowdown in interest, any change in pricing or spreads that are being asked for? Kinda give us a lay of the land in that environment right now or that part of the business.
Specifically, just to jump into on the Pagaya side, we actually see very strong demand for the type of assets that we generate. I'll just focus on some of key things that we did over the last few months on the back of sort of of what happened, call it, September. We sort of saw a little bit of that breaking momentum. Like in this environment, we announced 2 new forward flows on auto and POS. We saw significant demand in our ABS structure. The last one we did in early 2026, that was upsized and still oversubscribed. We did, we had a new structure in a revolving ABS with 26North. We managed to sell a lot of one of the certificates back in our ABS.
When you look at what Pagaya is delivering to our partners, we don't see a step back into their appetite to deploy capital through our platform.
Mm-hmm.
Having said that, if you go back and you look a little bit more at the macro level, you basically saw a very frothy environment on the private credit, particular on the first half call it of 2025 into call it Q3, which in some ways, you know, was, you know, where people are, were looking to see some sort of correction in that. What happened in September onward, it's not that the demand for these types of asset cooled off, but people are generally much more disciplined. It comes either in the form of pricing or diligence and things like that. Even in that environment in the last six months, you see like the spreads haven't really increased or anything.
The macro trend and the secular trend of private credit continue to deploy capital, particularly in the consumer assets, like consumer assets.
Got it.
Less so on the SaaS, software type of thing. It's still strong. Obviously, something, you know, to be cautious about could potentially lead to contagion and things like that, but we haven't seen really a step back in that.
Got it. Let's go back to your kind of relationships with partners, et cetera. You I guess historically you started out as a second look lender maybe about 10 years ago. Talk about the evolution of the product suite and how that has translated into your typical customer profile and margin or profitability.
Yeah. I think, obviously we're very pleased with the evolution of the business. You know, to your point, you go back, the company was 100% effectively focusing on the second look program. We integrate with our partners, and we call it Decline Monetization. Generally speaking, a type of loan that they would not otherwise underwrite because it doesn't fit into their credit box and so on and so forth, would come to us, and then we'd be obviously highly selective in how many of those loans we actually approve. We have transitioned that in the last 2 years to new products that we're quite excited about.
The whole product strategy is around one thing, which is to monetize increasingly more the application flow that the partners, the lending partners have, and also in some cases expand their application flow with some of the products that we do. I'll give you a couple of examples. There is examples like our Pre-Screen product, for example, which is us trying to utilize the marketing engine of our lending partners. We're already integrated right in the loan origin system. We're using the marketing engine to actually get access and identify consumers that they may not be looking at, and they may have the ability, obviously, for a certain risk profile, to have a higher propensity to activate an offer.
Right.
We have that understanding, and that's like a very sort of product that we're, you know, early days but like promising results. We have the Affiliate Optimizer Engine, which is when you look at the amount of data that we have across all the partners, across the different affiliates, we're looking to increasingly access these type of channels on their behalf and actually expand to different channels outside of call it the traditional Credit Karma. We have Dual Look programs. We have First Look type of programs. Dual Look, it's a very exciting program where you basically offer two different offers to the same consumer, one backed by Pagaya, one backed by the lending partner from a funding perspective, and that gives more optionality to the consumer and therefore increases the probability of them activating that type of offer. Multiple different products.
Where we are today is if you look at the pure Decline Monetization is about 50% of the volume and the fees that we generate, and the other 50% is across all these other products, which may have again a Dual Look, a sort of second look feature to it, but like different products with a little bit of a different business strategy.
Got it. Help us understand then when you're working with your partners, how like the lines are drawn or how they can move between like what they may wanna do versus you and how like I mean, obviously, if I were you, I'd in some ways be looking for ways to expand within their opportunity set or help them grow faster? Just talk about like how that relationship can ebb and flow.
Yeah. It's obviously it's a well-defined sort of process.
Okay.
It's quite dynamic. I like constantly looking because the application flow is obviously constantly changing. For example, as they're expanding, if you take for example, let's take BNPL. Like it's an industry and a product that's becoming increasingly more mainstream, and they call it, merchant acquisition strategy is very robust for those partners. We come in and sort of work side by side with them, whether it's a more interest bearing type of loans or like longer duration type of products. That's like a well-defined sort of an understanding of what we have, where we come in. As long as we're integrated, like it's very easy for us to launch this type of product.
Right. Right. Right.
It's a very dynamic process.
Got it. Let's dig into an example here of a partner and I recognize that the relationship is still fairly new, but how would you describe the way you work with Klarna and the borrower pool that you're each serving respectively? I know that, you know, Pagaya was somebody that they highlighted very heavily as they were going through the IPO process and continue to talk about.
Yeah. Look, it's not just for Klarna, but like all we're trying to do is enable effectively the partner to achieve sort of their goals. In the case of, let's say, the BNPL just.
Right. Right. Right.
... is not specific. The plan is, ultimately, what they want to do is they want to come in and continue to acquire more merchants. If you think about that, how to do that as they're competing with other originating platforms like that, is can we offer more solutions to their consumers at the point of lending? They may, for example, focus with certain merchants as an example in call it shorter duration products. We can come in and do a little bit of longer duration products, which is much more, much more tangential to the personal loan that we do from a duration and risk perspective. It could be interest-bearing, non-interest bearing. Ultimately, their strategy is obviously to continue to grow and expand their merchant network. That's how to think about it.
In the case of an auto partner, again, not to speak specifically about partner, it's all about the dealership satisfaction. We're integrated with some of our partners to all thousands of dealerships. What the lending partner is looking for, it's less interested in making fees out the loans and sharing those fees with us. It's much more so being at the point of, call it, lend. The consumer comes in, the dealer has now to offer certain options to that consumer. How do we increase the ability for, how do we increase the probability that they will show more of the, call it, Ally offer as an example?
Right. Right. Right.
Not only that, but increase the conversion, the probability of that consumer activating that offer. That's a very good example. Maybe just to dig into it, take two different offers that we have. You know, a consumer comes in and says, "I want a $30,000 loan for a car." Right? Our partner will say, "I will give $20,000 at 18% rate." We may come in side by side at the same time, still an Ally offer, but backed by Pagaya in the eyes of the consumer and the dealer, and we'll give $27,000...
Right.
A 22% rate. The consumer has, like, the same type of loan, different terms, and now they have more options to choose from. If you think about it, what does that for the dealer? The dealer is satisfied on the fact that they can offer multiple solutions to their customers, and over time, they will channel more of those types of opportunities to the sort of Ally, sort of, flow. That's how a little bit to think about how we enable that.
Got it. You mentioned a moment ago kind of your own product evolution, et cetera. I've got to imagine that will drive more interest among loan originators. Talk about your pipeline, how it has evolved over the years, and really what we should be expecting for developments here in 2026?
Yep. Obviously, you know, very excited where we stand. What we mentioned, you know, a quarter ago or so, we're at the point where we have the highest number of partners in the onboarding phase. We announced three partners that went live at our earnings. Very pleased to announce that we actually turned on a fourth partner yesterday.
Oh, nice.
to, not to be named yet, but, like, that momentum is actually very strong and very excited about our strategy of how to add more partners. We have another sort of 4 or 5 coming with a good, sort of balance between banks and non-banks.
And those four or five incremental would be through the course of 2026?
Yeah. The expectation is over the next coming quarters. Again, like, you know, based on the timing, but it will be based on 2026. What's most exciting about that, because there is a slow ramp-up, like once you open up a partner, you don't suddenly just have all the flow coming in and suddenly approving all the loans. What's the exciting part about this is it's actually planting already the seed in a very visible manner for 2025.
Yeah. Yeah. Yeah.
Beyond. That's the thing that we're most excited about. you know, obviously a lot more to come on that. The great thing about it is we can actually start with day one with our multi-product strategy. At the same time, when you think about what that does on our economics, we have said, like the fees that we earn on our partners is a range of 4%-5%.
Right. Right.
It's always a sort of, call it a combination of this growth, new partners, new products, existing partners. Existing partners are at a slightly higher, just more mature, more volume than higher fee rates. New partners come in, so at a start with lower volumes and therefore lower rates. Very excited about the trajectory. Obviously, it will impact as we think about that sort of 4%-5% range, which we mentioned on our call to gravitate towards the midpoint of that. Over time, you know, as we have more volume times this type of fee rate, we continue to grow the top line. Remember, given the operating leverage, there is a significant, very high flow through of those incremental fees going straight to the bottom line, which is driving, governing, and profitability.
Got it. Let's talk about funding, and love to hear your kind of ideas on how you think about your funding evolution and where do you see it going in the future?
Yeah. Obviously very pleased with the evolution there as well. If I take you back into 2022, for those, you know, who have followed the story, it was 100% reliant on ABS. In fact, I would say even a few years before that, not only reliant on ABS, but to a select few key investors.
Right.
that were backing that. If you look at our ABS infrastructure now in our platform, we work with 150 or so plus investors.
Mm-hmm.
that we rotate into our regular ABS cadence. We have really diversified the players that we work with, let's say, on the ABS side. On top of that, in 2024, we said that we're gonna diversify the funding away from ABS, and we delivered that with certain forward flows that we did with select investors. What we have said is that we'll continue to do so, and now targeting more partners like that, but of smaller size, as we continue to diversify on those in the same sort of strategy. We're also very excited about some of the deals that we did which deliver of a different structure, revolving ABS, which is effectively ABS that continues to recycle the capital within the structure. We did three of those. The across personal loan and point of sale.
To put that in perspective, those were call it combined, call it $1 billion of ABS structures. Because of the revolving nature, it actually allowed us to give us up to $3 billion of capacity over the next 2 years, and we wanna do more of that. Ultimately continue to diversify away and get increasingly more closely to more permanent capital type of structures, so that you have full visibility...
Yeah.
On one end, which is usually a little bit more costly, but combine it with access to capital market, which is obviously the frictionless way.
Right, right.
to get access to capital, but exposed to that capital market. That diversification for us is the winning strategy for our funding business.
Got it. Last couple minutes here. capital allocation. you're at the point where now you're generating cash. How are you thinking about uses of that cash, whether it's reinvestment, buybacks? Are there opportunities for M&A? Like, what's the priority for you right now?
It's a good question, and I think one of the great things about Pagaya, which I mentioned a little bit before, is, you know, as you think at any company, number one priority is to continue to grow the business.
Well, right.
We don't have that. We don't have growth CapEx. We have already built out the infrastructure to support even double the amount of volume without any incremental investment. That's a great place to be, obviously.
Yeah, for sure.
Now you think about capital allocation, there is other ways to support the business, with new structure, things that we do on the funding side to lower the cost of debt. Then obviously other things like buybacks across stock or even some of the high yield bonds that are now mispriced in the marketplace. We obviously look at that, and we'll, you know, we'll always assess the math real time, what makes sense for the next marginal dollar, how we're gonna get the most benefit. We actually did purchase back some of the bonds in the last month, two months, a little bit in December as well as in January. We'll continue to reassess it.
What I would say is, look, especially in an environment where you have some of the depressed prices, the other piece that we're looking at is, and not necessarily for 2026, but like maintaining some M&A dry powder.
Right. Right. Right.
Because ultimately, if our partners move into a new asset class, as an example, we wanna be there with them. We can grow these types of new asset class organically or inorganically. That obviously comes into the equation, and we always wanna maintain a good balance of liquidity, dry powder for these type of things as part of their capital allocation strategy.
That's great. Evangelos, thank you very much for joining us today, chatting about Pagaya. It's been great to have you at the Morgan Stanley.
Thank you very much.
Investment Conference. Thank you very much.
Thank you. Appreciate it. Thank you. Pleasure.
Excellent. Thank you.